Fed nationalism putting dampers on emerging markets

Overview and Observation: The markets continue to reflect concern on a number of fronts. The U.S. Federal Reserve has changed hands with Fed Chairman Bernanke having made his last speech as Chairman and the unknown related to the new Chairperson Janet Yellen. We have to determine her true intentions going forward even as preliminary indications are for sustained economic stimulus.

Economic data and U.S. corporate earnings are in full swing and so far mixed to negative. The Dallas Federal Reserve Bank President Richard Fisher responded to charges from Europe that the Fed was ignoring the plight of some Eurozone countries related to the effect of U.S. interest rate actions affecting dollar relationships. Fisher rejected complaints stating that “European countries have their own central banks” and the U.S. actions are intended for addressing its own responsibilities and not to act as “the central bank of the world.”

The State of the Union speech by President Obama left viewers with an “empty feeling” as the rhetoric contained hollow statements repeating promises made during his last State of the Union speech. Also, certain phrases were plagiarised from former President George Bush speeches and some of us experienced deja vu listening to the President. Some elements of the President’s constituency base suggested he quit after hearing the speech. Both liberal and conservative listeners were concerned over his willingness to bypass Congress and use Executive action to accomplish his wishes. All in all, the speech presented us with no new ideas nor effective solutions to existing problems. We will have to wait and see if anything this President actually does is meaningful for our readers and the investing public. The eloquence of his speech fails to placate our concerns and left us “scratching our heads” and without substantive answers. Now for some actual information…

Interest Rates: The 30-year Treasury bond futures (CBOT:ZBH14) closed at 133 25/32nds, up 16/32nds with the yield declining by 3 basis points to 3.603%. The 10-year Treasury note yield dropped 4.5 basis points to 2.649% its lowest since November of last year. For the week the benchmark 10-year yield closed 7 basis points lower on the week. Treasuries benefited from the sharp decline this week in equities as money moved to the safe haven of U.S. Treasuries. The yields on treasuries closed out the month with the largest decline in benchmark yields since August of 2011 as equity investors transferred funds to treasuries. The U.S. Federal Reserve decided to withdraw $10 billion from its monthly purchases in spite of the global concerns and the slowdown in emerging markets and that concerned investors who are now left “wondering” what the next “shoe to drop” will be. On Friday U.S. economic data was mixed. The Chicago Purchasing Managers Index dropped to 59.6 in January from the December 60.8. Economists had expected the reading to be 59.8. The Eurozone inflation declined 0.7% in January and was a surprise indicator of deflation that could stall the European economic recovery. The U.S. Bureau of Labor Statistics indicator measuring the price of labor, increased by 0.5% in the 4th quarter of 2013 exceeding expectations of 0.4%. Another factor was consumer sentiment which declined to 81.2 in January from 82.5 in December. We continue to feel the 30 year Treasury Bond will remain range bound between 125 and 135 now nearing the upper end of our projected range. We have programs to try to take advantage of the various disparities and market excesses.

Stock Indexes: The Dow Jones Industrial average (CBOT:DJH14) closed at 15,698,85, down 149.76 points of 09.9% and for the week lost 1.9% and for the month of January lost 5.2%. The S&P 500 (CME:SPH14) closed at 1,792.59, down 11.60 points or 0.7% and the week lost 0.4% and for the month lost 3.6%. The tech heavy Nasdaq closed at 4,103.88, down 19.25 points or 0.5% and for the week lost 0.6% and 1.7% for the month. The sharp declines in equity indices was the result of disappointing earnings, the continued rout of emerging markets, and renewed fears over deflation in the Eurozone. We have been warning for some time the lack of emphasis on the continuing problems with the debt of various of the Eurozone countries. We have also been warning that a sharp correction after the 28% gains in equities for 2013 could result in a 10-15% decline in values early in the new year. Our admonition for investors holding large equity positions was to implement risk hedging strategies. We are now experience what could be the onset of a bear market psychology which we feel is long overdue considering the “extravagancies” of the last few years. Once again, an “unemployed consumer does not consume” and the concept of a “jobless recovery” is inconceivable in our opinion. The “world” has become a “smaller place” over recent years and what affects one segment of the global economic picture affects all segments. Enlist our services for the determination of which hedging structures are applicable to your individual needs.

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